Chapter 19 - The need for a statement of cash flows Flashcards
What is a statement of cash flow?
shows how the entity has generated and used cash and cash equivalents during the period
What are the benefits of a SOCF?
- Helps users of accounts to assess the ability of the entity to generate cash
- helps users of accounts to compare the performance of different entities, because comparisons of cash flows are not affected by differences in accounting policies between entities
What does the IAS 7 require for SOCF?
requires companies to report cash flows for the period classified by cash flows from operating activities, investing activities and financing activities.
what are cash equivalents?
consists of short-term, highly investments that are readily convertible into known amounts of cash and which are subject to an insignificant risk of changes in value
what is cash?
consists of cash in hand and demand deposits
what are cash flows?
Cash flows from operating activities are the cash flows associated with the main revenue-earning activities of the entity
What are examples of cash flows?
cash receipts form the sale of goods or services
cash receipts from sources such as royalties and fees
cash payments to suppliers for goods and services
Interest payments can be classified as what?
as either an operating cash flow or a financing cash flow
interest receipts and dividend receipts can be classified as what?
as either an operating cash flow or an investing cash flow
dividend payments may be treated as what?
either a financing cash flow or an element in the cash flows from operating activities
IAS 7 allows cash flows generated from operations to be presented in which 2 ways?
Direct and Indirect method
What is the direct method?
Cash receipts from customers X
Cash paid to suppliers (X)
Cash paid to & on behalf of
employees (X)
= Cash generated from Operations
The indirect method of presenting cash flows from operating activities is based upon what?
information already available within the annual financial statements
The direct method of presenting cash flows from operating activities is based upon what?
Cash flow information extracted directly from the accounting records to classify cash flows
What is the indirect method?
Profit before tax X
Depn charge X
Profit on disposal of PPE (X)
Increase in inventories (X)
Decrease in receivables X
Increase in payables X
= cash generated from operating activities
What are investing activities?
Related to sale and purchase of non-current assets
What are financing activities?
Related to issue and redemption of equity and loan finance
What are cash payments in relation to investing activities?
cash payments to acquire property, plant and equipment
cash payments to acquire intangible assets and other long term assets
cash paid for a long term investment
What are cash receipts in relation to investing activities?
Cash receipts from the sale of property, plant and equipment
cash receipts from the sale of intangible non- current assets
Dividends/interest received
What are cash receipts in relation to financing activities?
- cash proceeds from issuing shares
- cash proceeds from a loan or issue of bonds/debt securities
What are cash payments in relation to investing activities?
- cash payments to redeem/buy back shares
- cash payments to repay loan or redeem bonds/debts securities
What are cash inflows?
into bank
What are some e.g’s of cash inflows?
interest received
dividends recieved
proceeds from disposal of property. plant and equipment
what are cash outflows?
out of bank
what are some e.g’s of cash outflows?
cash paid for purchase of property, plant and equipment
